June 29, 2018

Sandbagging: Delaware’s Position Uncertain?

“Sandbagging” in M&A refers to the ability of a party to an acquisition agreement to rely on the other side’s representation even if it knows that the rep is inaccurate when made. In the absence of language in the contract addressing the issue, courts in various jurisdictions have reached different conclusions about whether sandbagging is permissible.

The general consensus – bolstered by comments from Vice Chancellor Laster – has been that Delaware is a pro-sandbagging state. But as this Kirkland & Ellis memo notes, a recent decision from the Delaware Supreme Court has called that position into question:

While not a central element of the decision at hand, both the majority opinion (written by Justice Valihura) and a partial dissent (by Chief Justice Strine) addressed in passing the sandbagging question. In a footnote which acknowledges that the court did not need to decide this issue as the question was not before the court, Justice Valihura wrote: “We acknowledge the debate over whether a party can recover on a breach of warranty claim where the parties know that, at signing, certain of them were not true. [Defendant] argues that reliance is required, but we have not yet resolved this interesting question.”

The memo goes on to point out that in his partial dissent, Chief Justice Strine also raises doubts about Delaware’s view of sandbagging: “Thus, to the extent [Plaintiff] is seeking damages because [Defendant] supposedly made promises that were false, there is doubt that he can then turn around and sue because what he knew to be false remained so. Venerable Delaware law casts doubt on [Plaintiff’s] ability to do so. . .”

Wherever Delaware ultimately lands on the sandbagging question, the best advice is to address the issue head-on in your purchase agreement. That may be the best way to address sandbagging, but it’s still not a particularly common practice – 75% of deals included in a recent Nixon Peabody survey were silent on sandbagging..

John Jenkins